By Ben Eisen
and Charles Lammam
The Fraser Institute
The Ontario government is reportedly in a spat with the province’s auditor general about the size of last year’s deficit. The auditor general pegs the shortfall at $5 billion, whereas the government, using a different accounting method, says it’s somewhat lower at $3.5 billion.
It’s not surprising the Wynne government is willing to go to the mat to defend its estimate of last year’s budget deficit. As we approach the next election, a big part of the government’s PR strategy is focused on celebrating an expected return to a balanced budget. So Premier Wynne’s team has a big incentive to push back against dissenting views.
The source of the dispute hinges on the government’s desire to use a surplus from public-sector pension plans to cover its operating deficit. The auditor general disagrees.
We hope that proper accounting practices prevail in the end. But in bickering with the auditor general over the precise size of last year’s operating deficit, and with its fixation on being able to announce a balanced operating budget next year, the provincial government completely misses the bigger picture. Regardless of the exact size of the government’s operating budget balance this year or next, provincial finances are in bad shape and the Wynne government must develop a credible plan to repair them.
To understand why, we first need to distinguish between a government’s “deficit” and its “debt.” A government’s deficit is the difference between its annual revenues and spending (including debt service payments). A government’s debt, meanwhile, represents all the outstanding financial liabilities it has accumulated throughout its history.
Even if the government is finally able to claim no deficit next year, the mountain of debt accumulated over the past nine years will still be there. Just how big is this mountain? Since 2007, Ontario has seen its net debt (a measure of debt that adjusts for financial assets) approximately double, climbing from $157 billion to $308 billion. That’s about $21,000 per Ontarian. Servicing all of this debt will burden Ontarian taxpayers for many years.
A balanced operating budget next year won’t address this debt burden. In fact, the government’s own Financial Accountability Office (FAO) projects that provincial debt will continue to climb in years ahead, reaching $350 billion by 2020/21.
How can this be the case? Two reasons.
First, Ontario will accumulate new debt because the Wynne government plans to ramp up capital spending on things such as roads and bridges, which will be financed by more debt. The province can add debt, despite having a balanced operating budget, because its capital and operating budgets are accounted for separately. Indeed, the operating budget can be balanced at the same time the capital budget is in deficit.
Second, the balanced operating budget in 2017/18 may be tenuous. According to the FAO, the government has not done enough to bring spending sustainably in line with revenues. Without policy reform, the province will likely slip back into operating deficits after just one year of a balanced budget.
The Wynne government is nonetheless determined to spin the projected balance budget for 2017/18 as evidence of prudent management of public finances and justification to further loosen the purse strings, especially to provide yet even higher pay to public-sector employees (again, just in time for the election).
It’s a politically appealing narrative, but it doesn’t withstand scrutiny. The Wynne government has no plan to pay down the debt, and actually plans to pile on more. The work of repairing Ontario’s battered finances remains undone.
Ben Eisen and Charles Lammam are analysts with the Fraser Institute.